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Germany Quietly Explores New Fracking Rules

BERLIN – Governments know that July is generally a time when they can act without garnering much attention from the public or the press, which is more focused on upcoming summer holidays. This year, with the rest of the country transfixed by the World Cup, Germany’s Economy and Environment Ministries on July 4 issued new proposed guidelines to allow exploration of shale gas in the country at levels deeper than 3,000 meters. These guidelines also call on the government to assess the environmental impact of ‘fracking’ – drilling for gas using a mixture of water, sand and chemicals under high pressure.

Economy Minister Sigmar Gabriel had long hinted at such changes. Still, this is the first concrete step by the Social Democratic Party (SPD) to revise its support for the current de facto moratorium on fracking. Although the country is estimated to have 2.3 trillion cubic meters of shale gas reserves, domestic gas production declined by 10% in both 2012 and 2013 under the fracking ban. Fracking, if allowed, could lead to a significant rise in domestic natural gas production and a fall in fuel and electricity prices in Germany, which has some of the highest electricity prices in the EU since it implemented a plan to transition away from nuclear power and toward renewable energy in 2011. Electricity prices for households rose by 80% in real terms between 2010 and 2013. It would also make heavy industry more competitive with the US, where companies benefit from far lower prices for natural gas.

The purpose of the new guidelines is to test the political waters. Gabriel is very aware of the unpopularity of fracking in Germany. His government will assess the public’s reactions carefully before taking further action. Nothing has been agreed upon and it is unlikely that the government will grant broad permission to companies to pursue large-scale fracking on unconventional gas reserves over the next year.

But the guidelines are nevertheless a signal that the government is seeking a compromise with fracking’s opponents. The 2013 coalition agreement between the governing Christian Democratic Union-Christian Social Union of Bavaria (CDU-CSU) and SPD – which provides the policy roadmap for the current government – crucially did not ban fracking. Instead, it only said that the new government would be opposed to the use of toxic chemicals in hydrocarbon extraction.

This loophole indicates that the government will push to allow fracking if it can be done in an environmentally friendly way. The new guidelines offer companies a chance to prove that they can do it. The government is likely to adopt legislation in the next three-to-six months to permit limited field tests. If companies can indeed establish through tests that shale gas can be exploited with minimal effects on groundwater and the environment, the government will make a case to the public in favor of ending the moratorium on fracking.

Companies across the energy sector will continue to face policy unpredictability over the next one-to-two years as the government continues a difficult balancing act: Its policies to phase out nuclear power and expand renewable energy production are broadly popular. But the effects of these policies – higher electricity prices for consumers and companies – are not. The government will continue considering shale gas’s potential as it searches for solutions to fill the breach.

Jonathan Friedman is Western Europe analyst at Control Risks, the global risk consultancy. For more analysis, sign up for a free trial of our Country Risk Forecast subscription service.

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